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Published: Monday, 6/18/2012

Spain crisis: Bond yield hits bailout danger zone, nation gets no relief from Greece elections

ASSOCIATED PRESS

MADRID — Spain’s ability to manage its debt without an international bailout was thrown into doubt Monday after investors pushed its borrowing rates to the level at which Greece, Portugal and Ireland sought help.

Investor sentiment had improved briefly in the morning as electoral results in Greece suggested the country would not drop out of the euro currency union, a scenario that would have put severe stress on Spain’s markets.

But that market relief quickly faded in Madrid as it became clear that Spain’s fundamental economic and fiscal problems remain huge.

The interest rate on Spain’s 10-year bonds — an indicator of market confidence in how well a country can pay down its debt —hit 7.06 percent, and stocks fell 1.3 percent in Madrid while they rose throughout most of the rest of Europe.

The bond yield’s 0.19 percentage-point rise put it firmly in the 7 percent range that has seen three eurozone countries ask for a bailout.

The yield indicates at what rate a government can raise money from financial markets. So while Spain would be able to afford such a high rate in the short term — for a few bond auctions — it would find the rate too expensive in the longer term. If the rate does not fall back down, Spain may have to ask for foreign aid to finance itself.

Spain has already requested a bailout for its banking sector, which is saddled with billions of euros in soured investments after the implosion of a real estate bubble. The country is expected to announce by Wednesday how much it will tap from a €100 billion ($126 billion) eurozone fund after two independent auditors complete evaluations of the banks’ needs.

But because the government is ultimately responsible for repaying the banks’ bailout money, the deal has increased fears about the size of public debt. If the government cannot get the bailout money back from the banks, it will be saddled with the losses.

Those losses could prove too much to handle for the government, which is already struggling with a second recession in three years and the highest unemployment rate among the 17 nations that use the euro.

Financing the Spanish government, however, would likely be too expensive for the eurozone bailout funds to handle. Spain’s €1.1 trillion ($1.39 trillion) economy is bigger than those of Greece, Ireland and Portugal combined.

“Lending money is all about confidence, and that is shot to bits right now,” said Gary Jenkins, managing director of the Swordfish Research Ltd.

Some analysts said the pressure on Spanish bonds may have been exaggerated, but reflected growing concerns that the eurozone still seems unable to contain the financial crisis that has roiled it for years.

“It is simply the result of the market reflecting once again the notion that a comprehensive solution regarding containing the financial crisis in Europe hasn’t come forward yet and that still much work has to be done in order for investors’ confidence to return,” said Ishaq Siddiqi, market strategist with ETX Capital.



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